In Q1 2023, PARQOR will be focusing on four trends. This essay focuses on "Media companies have millions of consumer credit cards on file. What happens next?” and "The definition of scarcity is continuously evolving away from linear. What happens next?"
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If you want to understand the evolving business logic of “scarcity” and how it is moving away from the historical moats of the linear model, the future of Regional Sports Networks (RSNs) reveals more valuable insights than, say, the likelihood of NBCUniversal or Paramount shutting down channels. I wrote last Wednesday: “The leagues must adopt a new culture of customer relations while maintaining the old model in a smaller form and chasing scarcity in a new form. This culture change has not been a core focus of the leagues, in large part because the Diamond Sports bankruptcy has so much uncertainty around it.”
I had two follow-up thoughts after writing this:
Scarcity may be assembled in real-time in digital advertising, but audiences for live sports events cannot; and therefore,
The shift to direct-to-consumer (DTC) does not seem inevitable in the RSN story.
Key Takeaway
If the escalating costs of sports rights reflect an assumption of inelastic demand, and the leagues are planning for elastic demand at the local level across a portfolio of platforms, both cannot be true.
Total words: 1,100
Total time reading: 5 minutes
Real-time scarcity
Scarcity is the linear distribution model’s historical moat — the linear model enabled multichannel video programming distributors (MVPDs) to aggregate millions of households locally, regionally and later nationally. It has similar business logic to the circulation model of the print business.
One of my assumptions has been that a local or regional RSN which loses linear scarcity will inevitably need to replace cable audiences with streaming audiences. So, using data from the sports market size chart I linked to in last Wednesday’s mailing, New Orleans (home to the NBA’s Pelicans) and Memphis (home to the NBA’s Grizzlies) both face a difficult challenge if the Diamond Sports Networks goes bankrupt. They are the two smallest markets in the NBA: Memphis reaches 644,000 homes via Bally Sports Southeast for the 2022-23 season, and New Orleans reaches 687,000 via Bally Sports New Orleans.
The challenge for both teams is, if the RSNs go bankrupt how do you both market to and convert 644,000 to 687,000 local homes to streaming?
The DTC path is basic conversion funnel math: if 644,000 homes no longer have access to their RSN, then the objective will be to convert all homes to the Bally+ streaming app. This presents two obvious problems: first, the objective must convert and retain 100% of target customers (not feasible in DTC) and is that there is no guarantee that either all 644,000 homes have a broadband connection. Also, even if they have broadband, there is no guarantee they will shift their watching over to smartphones or tablets or connected TVs. If Diamond goes bankrupt, there’s no guarantee that viewers beyond the most passionate fans will be recaptured via streaming.
The second problem is related to local advertising. Michael Beach of Cross Screens Media has been increasingly highlighting the changing dynamics of the local advertising marketplace in his weekly newsletter State of the Screens (which I strongly recommend). One of his predictions for 2023 is “Reach for local advertisers is becoming a BIG problem - It is hard to break 60% reach (outside of skewed demos) with any TV platform, and finding the right mix has never been a greater challenge.”
By “any TV platform” he means broadcast, cable and streaming services. That means any marketing initiative by Diamond Networks or a league to replace the RSNs with streaming audiences will confront an inevitable 60% ceiling in terms of reach. He argues that “Local brands will continue to need broadcast, cable, and streaming TV to reach their goals, but over-relying on any of the three will lead to lower reach and over-saturation for those who see your ads.”
DTC is not inevitable
The hard upper limit of local advertising reveals an important insight: DTC does not offer a solution for real-time scarcity for local broadcast, nor is there a single alternative to cable companies delivering access to 644,000 to 687,000 subscribers on its own. The only imaginable alternative that could deliver an existing database with 100% of these lost subscribers is a public utility company. There is a long list of obvious, streaming-related reasons why their shareholders are not pushing famously risk-averse utility company management to take on the uncertain risks of the media and entertainment business.
Given this, the most notable reporting was from Sports Business Journal’s John Ourand from the NBA All-Star Game festivities in Salt Lake City, Utah that “league and team executives were nearly unanimous in saying that they are not panicked by the RSNs’ crumbling business plans — at least not in the short term.” Part of that is because if Diamond declares bankruptcy in March, there will be three weeks left in the season, and all NBA teams have received full rights fee payments from their RSNs. So in the worst-case scenario, the NBA will have to solve distribution for those three weeks.
But the long-term takeaway was that DTC is not an inevitable future for RSNs: “NBA Commissioner Adam Silver said he’s not concerned about recouping RSN revenue in the long term, citing local over-the-air television stations and national streaming services that could step into the breach.” In other words, the NBA is tacitly admitting it does not have the consumer data to solve for scale in streaming distribution on its own, either. More importantly, a national streaming service is not a 100% solution for the future of local sports distribution, either.
Ourand added that “Some team executives already have started talks with local broadcast groups, such as Scripps, Gray Television and Sinclair, even if they have a couple of years left on their RSN deals. They view these talks as a way to move on from the RSN if it implodes sooner than expected.” Scripps CEO Adam Symson added some detail to this point on Friday's Q4 2022 earnings call, predicting a “new model” for RSNs that is “potentially even nonexclusive, but that brings the best of what broadcast television can be, which is over-the-air and pay TV and the potential for additional direct-to-consumer upside for these teams”.
Something doesn't add up
The logic of his point mirrors Michael Beach’s point, above, that “finding the right mix has never been a greater challenge” for local advertisers. If or when the RSNs go bankrupt, *everyone* across sports leagues, advertisers and consumers seem risk averse to betting on DTC, alone. Scarcity will be feasible in real-time, and like advertisers, they will also need to find “the right mix” of distribution models.
That seems counterintuitive to read at a time when the value of sports rights is going up. Subscription OTT services’ global spend on sports rights in 17 major markets around the world will reach $8.5 billion in 2023 — up 64% versus 2022, projects Ampere Analysis.
The pricing of the national rights deals assumes inelastic demand for sports viewing and the local teams and advertisers are seeing the very opposite. If the escalating costs of sports rights reflect an assumption of inelastic demand, and the leagues are planning for elastic demand at the local level across a portfolio of platforms, both cannot be true.
Must-Read Monday AM Articles
[AUTHOR’S NOTE: There is a longer list of articles from the past week in PARQOR's Private Slack. If you are interested in testing it with me this week, please respond to this email.]
MLB currently is negotiating with pay TV distributors in the Denver, Houston and Pittsburgh markets about carrying baseball games in those markets after Warner Bros. Discovery shuts down its AT&T SportsNet channels.
I liked this recap of Warner Bros. Discovery's Q4 2022 earnings call from The Information's Martin Peers. It has a good walk-thru of the trade-offs between growth and profits.
A good read from Deadline: “There’s billions of dollars that is sitting there in the Netflix library not doing a thing; shows come and go and then they just sit there. I think the one thing we’re all realizing as an industry is this whole idea that everything you produce, you could put it in one place forever and ever for $15 a month, it’s not possible to make a viable business there because the numbers don’t add up.”
The best read I've found on the economics of Peak TV and streaming spending ending is this one by The Hollywood Reporter's Cynthia Littleton.
“If you think about FAST as not the child of pay TV linear, but the grandchild. They are the child of SVOD.” Great quote and interview with BBC Studios GM of FAST Channels Beth Anderson
Semafor reported on the demise of Spotify's bet on exclusive podcasts.
Digiday has a great read on how Amazon is leveraging AWS to accelerate its courtship of Madison Avenue.
Author's Note: The essay has been updated to include the definition of scarcity used in past PARQOR essays.